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In the age of inequality, Goldman’s CEO offers an unexpected lesson

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Lloyd Blankfein, chairman and chief executive of Goldman Sachs, reacts during a London panel in 2016. (Chris Ratcliffe/Bloomberg News)

By Roger Lowenstein

July 20, 2018

Lloyd Blankfein, who is stepping down as chief executive of Goldman Sachs, personified the era of economic inequality. At a time when average Americans are struggling to make wage gains, Blankfein was paid tens of millions every year, and his firm catered to the wealthiest of Americans.

This country could use more people like Blankfein.

It has become axiomatic that inequality is the United States’ leading social problem, and by that metric, Blankfein, if not quite public enemy one, is certainly a social undesirable. Indeed, Blankfein’s firm has the rare distinction of being an anathema to both supporters of Bernie Sanders and of Donald Trump.

But what if inequality is the wrong metric. Herewith a modest proposition: economic inequality is not the best yardstick. What we should be paying attention to is social mobility.

The concepts are similar enough to often be confused. For instance, if you lived in a country where all the wage gains were captured by a very few (inequality), it would be hard for anyone else to make progress (lack of mobility). And that’s not so far off from describing the United States today.

But the distinctions are important, and they lead to different sorts of conclusions. If the problem is defined as inequality, a big earner such as Blankfein clearly makes it worse. But if people from the wrong side of the tracks are angry not so much because they earn less than their neighbors but because, rightly or wrongly, they don’t think they could ever become, say, a Wall Street CEO, Blankfein should be a role model. His father was a postal worker in New York City. That he made it to Harvard and to the top of Wall Street should be an inspiration.

The brief here is that policies designed to increase the number of Blankfeins will do more good than policies designed to level income disparities.

When social policy is viewed through the prism of inequality, you get some wacky results. If someone on your block won the lottery, that would be a bad thing (raises inequality), right? Of course not. Okay, that example is facetious.

Here’s a real one: Critics have griped that whatever city Amazon.com chooses for its second headquarters will in fact be a loser because when Amazon moves in and creates 50,000 jobs, rents will rise and “inequality” will increase. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)

That’s not only a real example, it’s an absurd one. More people working at good salaries cannot be a bad thing (if it were, economic policy would be easy: Just make every employer close its doors and watch all rents go to zero).

Rising inequality, although a fact, is also very hard to find a culprit for. Not that economists haven’t tried. Some of the common suspects include globalism, immigration and the decline of labor unions. Jonathan Rothwell, an economist at Gallup, debunked all three — at least, he demonstrated that there is no clear correlation between those trends and rising inequality.

No clear cause means no clear remedy. “Inequality,” moreover, is not as simple as is often assumed. The term is used as though it were measuring a single quantity, such as poverty. More poverty is bad; that’s true, and it is always true.

But inequality, by definition, describes two things — it refers to inequality between one group and some other group. It depends on which two groups are being measured, and it matters, or should matter, if inequality is rising because the lower group is falling or stagnant, or because the higher group is rising.

In the United States over recent decades, two things have been happening. Wage gains have been very slow across most income groups. And incomes in the top 1 percent (and especially the top tenth of a percent) have been skyrocketing. It’s clear that returns to professionals have soared; it’s much debated why this is so.

It’s also far from proved — to me, it’s not even intuitive — that high incomes on Wall Street and elsewhere are the reason for, say, flatter wages in manufacturing. The fact that Mark Zuckerberg is so rich is annoying, and his separateness from Main Street may not be a great thing socially, but in an economic sense, his fortune did not “come from” the paychecks of ordinary workers. Most of the increase in inequality in the United States has occurred in or close to the Zuckerberg stratum, in the 1 percent and the 0.1 percent. On the other hand, income ratios between people at the 90th percentile and the 50th percentile haven’t changed very much.

What’s really a big concern is that mobility in the sub-Zuckerberg stratum is stagnant and by some measures falling. A study by six scholars led by Raj Chetty released a month after the Trump election looked at children born in the 1980s and found that only half, by age 30, were making more than their parents did at a comparable age — whereas two generations earlier, 90 percent were earning more than their folks. By that measure, mobility in the United States is falling through the floor.

That conclusion could be overstated. Greg Mankiw, author of a best-selling college economics textbook, has argued that due to innovations ranging from antibiotics to air conditioning that inflation statistics fail to capture, people today are living better off, relative to the past, than it might appear.

There is another way to think about mobility: How often do people at the bottom of the ladder rise to the top (or rise from the bottom to the middle, and so on). By that yardstick, mobility isn’t falling so fast, but it certainly isn’t as high as we’d like.

Raising mobility should be a priority — and as a guide to policy, it is less controversial, and less politicized, than inequality. More social mobility (however it’s measured) is always a good thing.

And we know something about how to engineer upward mobility: in a phrase, more and better education. A landmark 2017 study (co-authored by Chetty), showed that lower-income students who get to college do about as well as higher-income students at similar institutions. As the authors put it, “most colleges successfully level the playing field.”

Fortunately, more lower-income students are entering college. However, many are in community colleges, where dropout rates tend to be high and economic results are lower.

Lower-income students at elite private universities get very good outcomes, but not many go to such schools. (Indeed, a child born to the poorest fifth of the population is 77 times less likely to attend an Ivy League college than a child of the 1 percent.)

The authors suggest it is more critical to admit, and support, greater numbers of low-income students at quality public universities. Their study identified several — California State University at Los Angeles, City University of New York and the University of Texas at El Paso — that accept large numbers of low-income students and generate “very good outcomes.” Such colleges could provide a “scalable model for increasing upward mobility” — and at an instructional cost of $8,000 per student, compared with $54,000 at elite private colleges. Not enhancing taxpayer support for such schools would seem criminal. That’s just one idea — but it’s a big one.

Of course, taxes come from someplace, and the wealthy need to pay a higher share. But taxing the wealthy to pay for social goods is different from targeting the gap, per se, as the problem. One approach uses government to level, the other to promote opportunity and advancement.

The latter was enthusiastically embraced by Abraham Lincoln. The 16th president defended wealth because, he said, it was proof to the poor man that he could become rich.

“I want every man to have the chance,” he declared in a campaign speech in 1860, pointedly adding, “And I believe a black man is entitled to it — in which he can better his condition — when he may look forward and hope to be a hired laborer this year and the next, work for himself, and finally to hire men to work for him.”

Lincoln, a rail splitter turned railroad lawyer, understood the concept of social mobility, the American Dream.